China softening hardline stance on ore price

By Jiang Wei (China Daily)
Updated: 2009-07-02 07:26

The China Iron and Steel Association (CISA), which leads the country's iron ore pricing negotiations with international mining companies, is reportedly thinking about softening its previously hard-line on pricing.

An unnamed official from the association was quoted by Shanghai Securities News Wednesday as saying the CISA wanted to meet sellers half way when agreeing this year's purchase price for iron ore.

China softening hardline stance on ore price

Workers process steel at a factory in Jiangyou, Sichuan province, in June. Cheng Heping

China had been demanding foreign producers slash their price by between 40 and 45 percent. The unnamed source said the CISA might now be prepared to pay a price some 33-40 per cent lower than last years.

But he said it would be looking for something better than the 33 percent price cut negotiated by Japanese and South Korean rivals.

Citing another unnamed source, Reuters reported China might also be willing to accept a twice-per-year price-setting regime instead of a once-a-year system.

If such a new regime, which would better reflect short-term changes in demand and supply, were to be adopted, it would mark a key change in the decades-old annual pricing system between major miners and steelmakers.

Sellers and buyers will have to trade at spot market prices if they fail to reach an overall deal before the deadline at the end of June.

The CISA had initially said that if prices did not fall by more than 40 per cent - taking it back to 2007 levels - China's steel mills would not be able to make a profit.

Jia Liangqun, chief analyst with mysteel.com, a leading steel information portal, urged China to be patient in negotiations.

"An inappropriate price will lead domestic steel mills to losses and will be hard to carry on," he said. "It may even hurt the long-term relationship between sellers and buyers."

Some researchers said China was likely to accept the Japanese benchmark price - the 33 percent reduction on last year's price - in order to secure long-term contracts.

The alternative would be to carry on paying a spot price that could rise sharply.

"By abandoning the benchmark price ... Chinese mills run the risk that if the spot price rallies further, they could end up paying higher prices than the rest of the world," Macquarie analysts said in a report.